(a) State three benefits of a commodity exchange.
(b) Explain two methods of trading in a commodity exchange.
(c) State four requirements for trading in a commodity exchange
Explanation
(a) Benefits of commodity exchange:
i. It provides the opportunity for industrial buyers and sellers to meet and manage their price risks better.
ii. It ensures that farmers sell their products close to the market price by publishing future prices daily.
iii. It encourages continuous production and removes the need to look for buyers on the part of producers.
iv. It increases agricultural production.
v. Import/export competitiveness: As a result of the availability of information from the market, all parties know the market trend and requirements.
vi. It encourages standardization of products
vii. it generates foreign exchange earnings
(b) Methods of trading in a commodity exchange:
i. Open Outcry This is a method of shouting items of sale on commodity market with hands raised by the buyers to signify intention to buy
ii. E-Trading: This is a method where buyers and sellers of commodities are brought together through an electronic platform. The bargain is struck without negotiations.
iii. Pit trading: This is the method of trading where buyers and sellers meet in a particular area of the trading floor to reach a bargain through an open outcry system
(c) Requirements for trading in a commodity exchange:
i. The item must be possible of being sold by description.
ii. Demand must be large and supply must flow naturally to the market
iii. The commodity must be susceptible to standardization of grading.
iv. The commodity must not be a perishable one that could be subject to deterioration.
v. The traders must be bona fide members of the exchange and must not engage in insider trading.